Most people probably hate putting money toward their student loans every month. However, for your federal student loans, you could possibly cut that cost all the way down to $0 (i.e., nothing!) without postponing or falling behind on your loans. Yup, there's actually a way for you to "pay" $0 each month—thanks to income-driven repayment plans.
How $0 Payments Work
Income-driven plans include income-based repayment (IBR), Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), and income-contingent repayment (ICR). These plans base what you pay each month on how much you earn and how large your family is. Using this data, your servicer determines your monthly payment.
If their calculation spits out an amount less than $5, your required payment will be set to $0—for a whole year! If you want an idea of what your payment would be under income-driven repayment, you can add your loan info to your Salt® account to navigate this (and other) repayment options.
Why $0 Can Still Cost You
While you make $0 payments, your loan still racks up interest that may increase your loan balance—and you won't pay down your principal amount at all. If you think you'll be in a similar financial situation for the next 20 to 25 years when your repayment plan's forgiveness kicks in (more on that in a moment), then you may have nothing to worry about.
However, if you start making more money, your monthly payments may increase. And even if you eventually qualify for forgiveness, you could end up paying more than you would have in a standard repayment plan because of the interest that added up. You can estimate how much you could have forgiven versus how much you will pay interest with this calculator.
Silver lining: If you have subsidized loans (or portions of Consolidation loans that are subsidized), the federal government will pay any interest on them that your payments do not cover for up to 3 years under IBR, Revised REPAYE, and PAYE. After that, under REPAYE only, the government pays 50% of the difference between the monthly payment and the monthly accruing interest. The same goes for the entire repayment period for unsubsidized loans.
How IBR and REPAYE Plans Work
To qualify for IBR, your federal student loan payments must exceed 10% or 15% of your discretionary income depending on when you borrowed (this is called a "partial financial hardship"). If you qualify, your servicer will cap your monthly student loan payments at 10% or 15% of your discretionary income.
After 20 or 25 years (10 years if you work in public/nonprofit service) and 240 or 300 eligible payments (and, yes, $0 payments are eligible!), your remaining balance will be forgiven—though that amount may be taxable. Just remember that you could pay off the loan in less than 25 years, and this plan may cause you to pay more in interest. So, work the numbers prior to pursuing forgiveness.
REPAYE does not require a partial financial hardship for you to be eligible. Also, after 20 or 25 years (10 years if you work in public/nonprofit service), this plan will forgive your remaining balance. Under all IDR plans, this forgiveness amount would be taxable if you don’t qualify for Public Service Loan Forgiveness.
If you're interested in these plans, you can apply online at StudentLoans.gov or by completing this application and mailing it to your servicer.
Other Income-Driven Plans
Pay As You Earn (PAYE) works similarly to IBR, but it is only for new borrowers as of October 1, 2007. That means you have no federal loans made prior to that date or have paid off all your prior federal loans before borrowing on or after that date. In this plan, your federal student loan payments only need to exceed 10% of your discretionary income. In addition, your payments would be capped at 10%, and forgiveness is offered after 20 years.
If you don't qualify for IBR or PAYE, you can opt for income-contingent repayment (ICR). This plan caps payments and offers forgiveness—but like REPAYE, it doesn't require a partial financial hardship.
The Bottom Line
If you are in financial trouble, it is possible to have a very low monthly payment. Postponement options, like deferment and forbearance, can help in these instances of financial trouble. However, these come with time limits. Instead, you may want to consider one of these other income-driven options. You could have a minimal or $0 payment while also getting closer to forgiveness.